Rate rises slowing - APAC bried 29 Nov

A game of chicken: Did Powell just blink? That’s how last night’s speech from the Fed chair is being interpreted. Debate has raged whether in the face of financial market turmoil, the Fed will be forced to cool its rate-hike rhetoric. Powell’s speech – and this is speculative – may have represented this. Gone was the talk of rates being “a long way” from neutral, and that rates may need to move “past (the) neutral” rate. Instead, it was replaced with the key comment interest rates are “just below” the neutral range, and that future rate hikes, as Fed Vice President Richard Clarida implored yesterday, will be “data dependant”. Perhaps we saw last night, in the tradition of many-a Fed Chair gone before, the latest incarnation of a “Fed-put” – that is, this time around, a “Powell-put”, which will underwrite financial market strength at the first sign of true-trouble.

Rates and bonds: The reactions in financial markets have been predictable, but assertive. US Fed fund futures suggest that traders have heard enough to justify pricing in an 80 per cent chance of a Fed-hike next month. But naturally, the shifting of expectations has been seen in the pricing for rate hikes in 2019. The Fed’s last dot-plots implied 3 hikes for next year – and markets got close to pricing the full three at stages only just over a month ago. We are now seeing just the one, and for some very dovish folk, even that’s too bullish. The short end of the US Treasury curve is manifesting the shift in sentiment: the benchmark 10 Year Treasury note is yielding 3.05 per cent currently, but the yield on interest rate sensitive 2 Year note has fallen back to 2.80 per cent, taking the spread between those two assets back to 25 basis points.

Currencies: The US Dollar has been ubiquitously dumped by extension of the fall in rate expectations and yields on US Dollar denominated assets. Even despite no sort of counterbalancing good news to prop-up any of the other major world-currencies, the effect of the weaker green back has been spread evenly across the G10 heat-map. The GBP and EUR, which are in as vulnerable a place as ever due to ongoing Brexit drama, are up to the 1.2840 and 1.1380 levels, respectively. The traditionally risk-off Japanese Yen has appreciated slightly, as did gold, which is trading at $US1228 per ounce, and the embattled Chinese Yuan climbed to fetch 6.93. While the highly liquid risk-proxies, the New Zealand Dollar and Australian Dollar, have spiked to 0.7320 and 0.6880, respectively.

Equities: The greatest action of course occurred in Wall Street equity markets post-Powell’s speech. The major indices have sky rocketed on the relief that discount rates may be steadying their rise and the tightening of monetary policy conditions may be nearing its zenith. It was the high-multiple, growth and momentum stocks that led the charge, predictably. The NASDAQ – at time of writing, with about an hour left in the US session – has rallied 2.30 per cent. The mega-cap laden Dow Jones is also up over 2 per cent, while the comprehensive S&P500 is up by just under 2 per cent. European indices missed out on the fun, closing well before Powell’s speech. However, futures markets are exhibiting early signs that European markets will join their North American cousins in the relief rally upon their open later today.

When bad news is good news: Maybe this a grand statement inspired by the major plot twist markets experienced overnight, courtesy of Fed Chair Powell’s dramatic change of tact, entering the last stanza for financial markets in 2018. But the price action and sentiment shift seen in last night’s trade does appear a microcosm of the perpetual battle faced by central banks for perhaps decades, if not at the very least, since the Global Financial Crisis. Asset markets appear dictated not by fundamental strength in the macro-economy, but by the central bank-controlled credit-cycle that investors have come to rely upon for their investment cues. It’s a contentious debate, and one that hasn’t been resolved. However, last night’s developments hark back to years gone by when bad economic news was judged to be good news for financial markets, and good economic news was judged to be bad.

Let the good times roll? Without delving too deeply into the philosophy behind the idea – although suggested reading would include the work of Hyman Minsky – the contradicting information received last night pays heed to this notion. Aside Fed Chairperson Powell’s speech, overnight there was a raft of news that highlighted the world is experiencing slower economic growth, and that the global economy has quite possibly reached peak growth for this cycle. A speech for BOE Governor Mark Carney highlighted the dire economic consequence to the UK economy in the event of a no-deal Brexit. US GDP came in a smidgeon below forecasts and affirmed the view the US economy may gradually slow-down in 2019. And Christine Lagarde, the Managing Director of the IMF, stated last night the global economy may be slowing faster than expected. Nevertheless, Fed policy hogged the limelight, with the prospect of marginally more accommodative monetary policy conditions inspiring risk-on behaviour all the way from, credit, to bonds, to equities, to currencies.

The ASX: SPI futures are pointing to an ASX200 that will relish the global relief rally today. The ASX200 ought to jump about 30 points at the open, likely breaking through 5745-resistance in the process, and opening upside to the next key level at about 5780. Volumes have been quite high across the ASX this week, and to the presumed delight of the bulls, the strength is demonstrating signs of running deep. For one, although the ASX200 was down 0.06 per cent for the day yesterday, it was the small and mid-cap stocks demonstrated the most upside. Really, it was the materials space once more, confronting falling iron ore prices, that sucked 6 points from the index yesterday and was responsible for the markets weakness. Overall, a true bullish turnaround is still some way off, but the chance of a true turnaround in the market has increased meaningfully overnight.

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The AUD continues to trade lower following the Chinese ban of Australian coal to its Dalian port. The ASX has benefited for the weaker exchange rate as it is trading at its highest level since October.

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Wall Street pulls back: On balance, and with Wall Street a few hours from ending its session, it's been a soft 24 hours for equities. The often heard calls of a looming "new-peak" in the market in the shorter term can be heard from some. Momentum has certainly slowed down. The S&P500 has its eyes one 2815 again - that crucial area where that index sold off on three occasions from October to December last year. It could be a slow drive to arrive at a challenge of that level now. The dovish Fed will keep the wind behind US stocks; but the earnings outlook, post reporting season, has dimmed on Wall Street, while positive regarding the trade war has already been heavily juiced.

Trade war truce already priced in? Markets are positioned for a relatively positive outcome in the trade-war, and that's manifesting in pockets of market activity. A true resolution in the trade war isn't expected, however an extension to be March 1 trade-truce-deadline seems to be. The overnight fall in US Treasuries, coupled with a topside break of copper's recent range, is a testament to this sentiment. The yield on the US 10 Year note has jumped back towards 2.70 percent, while the 3 month copper contract on the LME leapt another 0.83 per cent overnight. In G4 currencies, the US Dollar is stronger against the Euro and Pound, albeit very, very marginally, but weaker against the Yen.

The curious case of gold: Gold prices have dipped slightly courtesy of the stronger Dollar and greater confidence in the policy-outlook for the world's major central banks. The price of the yellow metal is sitting just above $1325 presently, as it continues its short term trend higher. One of the more divisive debates amongst traders currently is the outlook for gold. Like any market, time horizons are crucial to illustrating the trend for an asset's price.

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